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Wednesday, January 14, 2009

Budgets can't be balanced with windfalls

Rather than helping New Hampshire, a federal bailout of the states has the potential to create a long-term deficit and undermine the financial stability of our state. Free money from the federal government can't be used to balance the budget in any real sense and could create long-term obligations we can't afford to fund ourselves.

Ever since the federal government began printing money a few months ago to help bail out everyone with significant political clout in Washington, governors across the country have looked to the federal Treasury with dollar signs in their eyes.

The feds began the excitement by creating a $700 billion bailout fund to buy troubled assets from financial institutions and also to loan money to automakers. In theory, the government receives assets that may have some future value, or it expects to be paid back when the auto industry recovers.

Nonetheless, governors see the federal government as a big pot of money to tap. States face a discipline unknown to the federal government: They are required to balance their budgets, or at least try to. Where Washington spendthrifts merely nod with amusement at suggestions of fiscal discipline and go off to tax and borrow, the states have to balance spending and revenue. In good times, this is relatively easy. As the economy turns sour, it becomes more difficult.

Enter the state plan to have the best of both worlds. We can balance our budget by merely getting free cash from the big spenders who don't have to balance their own budget. They don't have the money, but they're borrowing so much anyway we can tap them for a few hundred billion dollars.

Today, it is likely that the federal government will borrow money so state governments don't have to, send them a check and not ask for it to be repaid.

If it happens, we must be careful not to count that money toward balancing the budget. It will be a one-time infusion of cash that will have to be replaced later if used for recurring expenses.

State budgets include operating costs and capital costs. When news reports talk about the budget, the revenue shortfall, the looming deficit or state spending, they mean the state's operating budget -- general program expenses that we expect to have for more than just this year.

These programs are the rough equivalent of your household expenses, such as mortgage and utility payments. In your budget, you use wages to pay for them. You don't budget around windfalls, such as an unexpected lottery prize.

The state is no different. Operating expenses can't be balanced by borrowing or bailouts. Rather than fixing the problem, that merely hides the problem for someone else to fix.

The current budget is a good example. The two-year budget was not fully balanced in this sense when it was passed. General fund spending was $106 million more than the taxes the budget expected to raise. Part of the difference was covered by a large transfer from the education trust fund. But about $21 million would have come from surplus money, not revenues.

When the revenue estimates turned out to be high, more money was needed. Much of it has come from one-time revenue sources. The state has borrowed money for operating expenses, received one-time transfers from the Pease Development Authority, and is looking to collect one-time surpluses from other areas. In addition, it spent about $40 million of surplus money to balance the first of the two budget years.

All that borrowing and one-time money means the problems weren't fixed. They merely added to next year's growing problem. A federal bailout presents exactly the same danger. We have to be careful not to use any federal largesse to merely hide an operating budget deficit.

I hope the federal government pares the amount of money it will borrow on behalf of state governments. If it doesn't, we should work to ensure that such money gets spent only on capital costs that don't recur. In addition, we should try to spend it on priorities we have established anyway.

The state should not develop a list of projects that weren't a priority before. If we didn't want to borrow, tax or cut spending to fund something ourselves, borrowed money from the federal sinkhole shouldn't change our mind.

Whatever we do, we should move cautiously so federal help doesn't make things worse.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.